What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, China Quanjude(Group)Ltd (SZSE:002186) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for China Quanjude(Group)Ltd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = CN¥31m ÷ (CN¥1.6b - CN¥482m) (Based on the trailing twelve months to September 2024).
So, China Quanjude(Group)Ltd has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 8.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for China Quanjude(Group)Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of China Quanjude(Group)Ltd.
The Trend Of ROCE
Like most people, we're pleased that China Quanjude(Group)Ltd is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.9% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 33%. China Quanjude(Group)Ltd could be selling under-performing assets since the ROCE is improving.
The Bottom Line
In a nutshell, we're pleased to see that China Quanjude(Group)Ltd has been able to generate higher returns from less capital. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
While China Quanjude(Group)Ltd looks impressive, no company is worth an infinite price. The intrinsic value infographic for 002186 helps visualize whether it is currently trading for a fair price.
While China Quanjude(Group)Ltd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
